GST ‘could propel inflation to 26 p.c.’

Press, 28 July 1986, Page 1

GST ‘could propel inflation to 26 p.c.’

The introduction of the goods and services tax in October could push inflation to 26 per cent next year, according to a senior lecturer in accountancy at the University of Canterbury, Mr James Bacon.

Mr Bacon, a former New York business systems consultant, says in the latest issue of the Canterbury Chamber of Commerce’s “Economic Bulletin" that there are several factors inherent in GST that will bring upward pressure to bear on the cost of living and inflation. Mr Bacon takes issue with the official Government line that GST will mean a 5 per cent overall rise in prices. His prediction of a 26 per cent inflation rate for the year ending Decern-

ber, 1986, compares with 15.4 per cent recorded for the year ended December, 1985. It is fairly certain, he says, that wage claims will take account of any cost-of-living increase brought about by the introduction of GST, “as well as subsequent and inevitable increases in the rate of GST.”

Another way GST will Increase the cost of living is by raising the cost of doing business, he says. If business costs increase, sooner or later prices usually increase.

One of the secondary effects of GST will be that inflation will tend to draw taxable incomes upwards, and this results in a general movement to higher levels of marginal tax and thus higher average rates of tax.

“There is a re-establish-ment of previous levels of income tax, which cancels out the effect of previous income tax reductions implemented in conjunction with GST,” lie says. Indirect taxation such as GST may be “fine in theory,” but if badly implemented, a bad tax will result.

Mr Bacon says that a retail sales tax would better serve the aims that the Government is trying to achieve through GST. This type of tax has been used in a number of countries and is a simple method, costs less to administer, is less of a burden for business, and involves only retail shops and stores.

GST, in spite of the fundamental change that it represents, is being imposed without the benefit of proper evaluation, debate or consensus, he says.

Mr Bacon disputes that the reduction of personal income tax will significantly encourage added enterprise and effort. It will reduce productivity and stifle business effort and wealth-producing activity, he says.